18 comments to Samizdata quote of the day

Of course it makes sense; in fact, it’s brilliant (which is precisely what I would expect from Schlichter). It is a pithy and memorable way of making a very important point. But since you’re having trouble teasing it out let’s let Schlichter elaborate:

There should be no policy. The existence of policy is already the problem. What we need is proper capitalism in money and finance. We do not have that now. What we have is limitless state fiat money, quantitative easing, systematic market manipulation, bailouts, regulations, the IMF, the World Bank, the FSA, FDIC, TARP and LTRO. We need proper markets, not more policy, not more manipulation, and not more bureaucracy. And not more fiat money. We need the state to exit the field of money and banking. Completely.

The only complaint about this SQOTD is that it didn’t contain a link to the article from which it was taken. Here it is; fixed it for you. (I love the title, too; that could have been a SQOTD in its own right.)

Zero regulation of banks is a fine ideal, but then we end up with stuff like the Panic of 1907, bank runs, Ma & Pa Kettle losing their savings accounts when their bank goes under, and so on and so forth. The politicians didn’t just come up with the FDIC and The Federal Reserve in a vacuum, but as a response to specific problems in banking.

Like it or not, government not being involved in certain sectors leads to just as many problems as government being involved in those same sectors.

Steven, I don’t object to deposit insurance per se, I object to the FDIC. The worst way to “solve” any problem is to have the government do it. Private deposit insurance would be intelligently underwritten and rationally priced. The FDIC’s version is neither.

And as to the Federal Reserve, you are completely wrong. It was created in secret, by a cabal of the biggest bankers (Morgan, etc.) and designed specifically as a vehicle for the government to bail them out in the event of a problem (caused entirely by their unreasonably low capital levels and high leverage). Read “The Creature from Jekyll Island”; it will open your eyes.

Like it or not, government not being involved in certain sectors leads to just as many problems as government being involved in those same sectors.

Steven,

Read even just the Wikipedia article on the Panic of 1890 and, leaving aside the strong politician provided incentives for over expanding railroads, it is undeniable that it was the direct result of government action, not inaction. I am quite confident that if you dig deeply enough into any of those ‘panics’, you’ll find politics (either populist, corporatist or both) as the principle cause, not free and open market competition.

It’s not a question of government doing it better, it’s a question of something like FDIC being a government job because the market just didn’t do it. I don’t like government being involved with the banking sector, but the simple truth is history is rife with examples of the market and industry failing to police itself. Even when there is something like government oversight, banks play loose and fast with the regulations until it all collapses and intervention is required because Ma and Pa Kettle don’t want to keep losing their life savings because a bunch of bankers want to make a few bucks. The banks bring a lot of this on themselves.

This is the biggest failing in selling libertarianism to the public. It’s impossible to tell the public that if we just let the market handle it all will be okay when there are numerous examples of the market not wanting to handle whatever. The free market looked the other way over stuff like worker safety which forced the government to form OSHA. The free market just dumps toxic waste everywhere which lead to the EPA. The free market exploited labor with all kinds of unfair practices (e.g. company script) which lead to the NLRB.

I don’t like government being involved in much more than providing national defense and keeping roads open, but the idea that the free market will fix the problems the free market creates is just shortsighted at best. Is there a solution, a happy balance between letting the free market do what it wants and government intervention? I don’t know, but neither solution is working right now.

As far as the formation fo the Fed being some secret cabal, that is just wrong. A return to a centralized bank was debated as far back as Jackson destroying the central bank, and what the meeting on Jekyll Island wanted and what was passed by Congress weren’t the same thing. The cause of the Panic of 1907 was the Knickerbocker Trust not being able to borrow from another bank. The Fed was designed to keep that from happeneing again by having a central bank able to loan to other banks. It wasn’t some conspiracy theory designed to fleece the public. That it has been manipulated to allow some banks to do that is not something I would doubt, but it wasn’t the intent or how it was structured.

Sorry, Steven, but that was exactly how the Fed was constructed: to enable the federal government (under cover of a quasi-private Federal Reserve System) to bail out profligate and undercapitalized banks. Yes, runs have always occurred, but they were generally localized, confined to individual banks. It is only when the government gets involved, and tries to prop up banks which should fail, that the damage spreads and becomes systemic. Panics and runs are always shortlived unless the government intervenes, which in the long run that makes things worse.

Incidentally, the FDIC had nothing to do with the Panic of 1907; it wasn’t created until 1933. And yes, it was created in response to the large number of bank failures in the Great Depression, but if you dig deeply enough you find that the GD was itself largely the result of Federal Reserve actions and policies. It’s a fine example of the Law of Unintended Consequences. As well as being an example of the “piling on” effect, where the bad results of one governmental action are used to justify still more government action.

In the long run government intervention always makes things worse than the free market would. The creation of such things as OSHA and the EPA were not the result of market failures but of government failure: it was government (largely through its courts) which protected large and powerful corporations from tort actions which would have put a stop to unsafe work practices or polluting the waterways.

The biggest failing of libertarianism isn’t telling the public “that if we just let the market handle it all will be okay.” All will not be OK; there will always be market failures. That’s the nature of a free market system; it’s the price we pay for attaining the highest standard of living in human history. But it will be substantially better than trusting in the ministrations of an all-wise government. The biggest failing of libertarianism lies in not selling the concept that government “solutions” are always worse than the occasional market failure.

I’d like to remind everyone that the concept of limited liability companies (or corporations) is a government invented and enforced concept. Government licences limited liability under certain conditions; there are legal sanctions against companies (including their directors) for going outside those conditions.

Banks are a special type of limited liability company for which additional conditions are appropriate.

The problem we have had recently with bank failures is that the additional conditions have been demonstrably inappropriate. This is both because these additional conditions have been changed and because the circumstances have changed.

That some of the problem is down to the wishes of the banks is not a valid defence for government: robbers surely prefer a narrower definition of robbery; doubtless murderers and fraudsters likewise – to say nothing of all of them liking lighter punishments.

Government has failed here, in much of the modern world. However, the failure is one of detailed conditions. It is not one of the concept of government regulation of banks.

One possible solution to this problem would be to do away with limited liability protection for retail banks; this being just an extreme case of requiring greater reserves. However, it is not really necessary to go that far. But it might well be a good idea to (go back to) retail banks being separately regulated from other sorts of banks.

Oh, and surely monetary policy and bank regulation/rescue are different things. If only governments would recognise that.

One possible solution to this problem would be to do away with limited liability protection for retail banks; this being just an extreme case of requiring greater reserves.

Far from it. Removing LL from banks doesn’t direct the amount of the reserves either up or down, it changes the source of them. Presently, FDIC – a socialized risk transfer system, provides reserves in excess of liability limits. Removing those limits means the reserves come entirely out of the funds of those making the decisions and keeping any profits.

Limiting liability by burdening non-consenting contributors, as FDIC does, is half of a socialist system that leaves profits with the investors but socializes losses.

Before anyone makes the argument that FDIC funds for smaller numbers of bank failures come from within the banking system, even if we ignore that those funds are entirely inadequate for large scale failures, it still only implies consent in an open banking economy. In a fiat dollar/pound/euro economy, the mere existence of compulsory contributions by banks to a particular currency system’s stability is a socialized redistribution of risk to everyone who would rather use different media of exchange.

Far from it. Removing LL from banks doesn’t direct the amount of the reserves either up or down, it changes the source of them.

I sympathise with the argument, though I think my detail was better.

The underwriting by the government is not total, except in the case of banks ‘too big to fail’. But even that is not true, as government might change the definition of ‘too big’.

With banks without limited liability (which is and will remain, I reckon, a hypothesised situation rather than an actuality) the quantity of reserves would increase in practice. This is because it would be set, in the worst case, as the total assets of the sum of shareholders (and directors, at least in the UK). Shareholders, being sharper than governments, would notice this. Most small shareholders would bug-out. Large shareholders would constrain the directors to have greater shareholders’ funds with respect to risk; this would only happen by increasing the reserves relative to the risk; and this would happen by directors reducing the risk (a key aspect) and increasing the reserves.

It is also, as Midwestener points out, that the source of extreme levels of emergency reserves would move; though that is actually from taxpayers (and/or, of course, customers) to shareholders.

In practice, or course, things will be different. Though we might be fortunate enough to get, in the future (as in the past), some banks and some governments that better understand the risks they are taking: in both their lending and their legislating.

This is because it would be set, in the worst case, as the total assets of the sum of shareholders (and directors, at least in the UK). Shareholders, being sharper than governments, would notice this.

Er, no. What you are describing is a variation of the “deep pockets” philosophy. In liability judgments, if a rich party is found to bear 20% fault and an indigent party is found to bear 80% of the fault, “deep pockets” says the rich guy picks up the tab for the poor guy. That is just another variation of redistribution.

In a true accounting of liability, the shareholders are only liable for the loss corresponding to their share of ownership. In the case of banking, if large stakeholders are otherwise indigent, once their personal assets are liquidated, the remainder of the loss is borne by the depositors. Under those terms, I would not deposit money in any institution without seeing verified personal financial statements of the principle stakeholders. In actual practice, banks will no doubt be rated by market sector auditors or will carry open market sourced deposit insurance that will be priced by the insurance underwriters.

Markets are far more reliable at judging and rewarding the relative risks of behavior than governments are. That is why the first thing corporatists do is use the government to overrule the market’s judgment. If limited liability is ended, what will happen is insurance underwriters will immediately begin offering liability insurance to stock holders that they will price according to their (the insurance underwriters) assessment of the stock issuing company’s behavior.

It is clear that current Economic Democracies failed. The Government has too much economic power, it can without problem put every citizen heavy debt. Then after it disgraces itself it can devaluate from counterfeiting of money to QE , in short full financial power.
A Totalitarian Financial Power in hands of Politicians.
Why the supposed constitutional republics/kingdoms tolerate this totalitarian power in hands of the Government?

So we need that the current Partial Republic we have is extended also to financial matters.Protecting the citizen from this totalitarian power from the state.

That is btw the failure of Founding Fathers in case of USA. They created a one leg Republic.

With regard to bank shareholder/director liability, the old rule used to be that bank shares were subject to assessment at double their stated (or “par”) value. This was actually an interesting compromise between unlimited liability (including the “joint and several liability” issue Midwesterner noted) and the complete limitation on liability we see today. It might be worth exploring a return to that structure. Of course, some other conforming legal changes would also need to be made, such as expanding the rule to apply to bank holding companies as well as banks, eliminating the current practice of having “zero par value” or “$0.01 par value” shares, preventing banks chartered in states which do not adopt this rule from operating in states which do, and probably many other wrinkles I haven’t thought of, but it’s certainly possible.

A great line, Paul, and very true. But I think you’re being a little too hard on the Framers. The did the best they could based upon what they knew (and they knew quite a lot). But they couldn’t predict everything, and their creation did serve us rather well for over a century. That’s probably about the best one could reasonably hope for. Eventually the legions of politicians, judges and lawyers will inevitably destroy any human product.

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